Elasticity of Demand: The change in the demand for a product when a certain factor of demand is changed, put into three categories as follows:
Price Elasticity of Demand [PED]:
Measures the change in the quantity demanded when the price factor is changed
Formula used to calculate is percentage change in quantity demanded divided by percentage change in price
NOTE: Negative values show an inverse relationship between price and quantity demanded, but only the ABSOLUTE VALUE is important.
Elasticity is more than 1 such as 1.62 >1 means that the product is relatively elastic (bigger the number, less important the individual product is)
Elasticity less than 1 such as 0.54 < 1 means that the product is relatively inelastic (smaller the absolute value (negatives become positives) the more important the individual product is)
Elasticity is equal to 1 such as 1 = 1 means that the product is unit elastic (the price change will result in the same fraction of change in the quantity demanded)
Determinants of PED:
The amount or relativity of available substitutes. The more similar some products are or the number of other replaceable products available makes it more elastic, less similar substitutes and and smaller range of available substitutes will result in a smaller elasticity, perhaps making it inelastic.
Necessity of the product. If a product is considered essential in our world, such as medicine, natural resources (food, water) or electricity, then it will be extremely inelastic because people will still need the product to maintain their lifestyles whether the price is high or not.
The product over time. Over time, the elasticity of the product will increase after the change because the population will have had time to adapt to the situation (price increase) and by then will have chosen substitutes. In the short term, the product will be relatively inelastic, but after a long period of time (years) the product will slowly increase in elasticity.
Government taxes and elasticity. The government will use information such as the elasticity of a good or individual product to determine whether or not to tax the product. This is done because taxing an elastic product will increase the price, bring down total revenue, and result in unemployment which governments do not like. Therefore, gover nments will most likely tax inelastic products (gas, water, electricity) which results in total revenue increasing and less unemployment.
Cross Elasticity of Demand [XED]:
The change in quantity demanded of a product that is affected by the price change of a different product
Formula used to calculate is percent change in quantity demanded of product A divided by the percent change in price of product B
Explains and illustrates the relationship between different products
If the XED value is positive, it means that the two products are substitutes (the larger the positive number, the more easily substituted the two products are)
If the XED is negative, it means that the two products are complements (the lesser the value, the better the two complement each other)
If two unrelated products are examined the change in one will not affect the change in the other, therefore the XED will be zero
Income Elasticity of Demand [YED]:
The change in quantity demanded of a product when the consumer's income is changed
Formula is percentage change in quantity demanded of the product divided by the percent change in income of the consumer
Elasticity of Demand:
The change in the demand for a product when a certain factor of demand is changed, put into three categories as follows:
Price Elasticity of Demand [PED]:
Determinants of PED:
Cross Elasticity of Demand [XED]:
Income Elasticity of Demand [YED]:
Summary:
Questions:
Found Awesomeness:
Connection 1:
Connection 2:
Original Awesomeness:
Sources: